Firm Diversification and Earnings Management: Evidence from Seasoned Equity Offerings

Posted: 11 Dec 2007

See all articles by Chee Yeow Lim

Chee Yeow Lim

Singapore Management University - School of Accountancy

David K. Ding

Singapore Management University - Lee Kong Chian School of Business

Tiong Yang Thong

SIM University (UniSIM)

Abstract

Popular press suggests that diversified firms are more aggressive in managing earnings than non-diversified firms. We examine this claim in the seasoned equity offering (SEO) setting, where firms have been shown to have the incentive to manage earnings upwards. Using the cross-sectional modified Jones (1991) model to measure discretionary current accruals, we find that discretionary current accruals are higher among diversified firms than in non-diversified ones. Our evidence is consistent with the view that the extent of firm diversification is directly related to the degree of earnings management. We further show that diversified issuers with high discretionary accruals underperformed other SEO firms.

Keywords: Seasoned equity offerings, Corporate diversification, Earnings management, Accruals, Stock market performance

JEL Classification: G32, G34, M41, M43, G12

Suggested Citation

Lim, Chee Yeow and Ding, David K. and Thong, Tiong Yang, Firm Diversification and Earnings Management: Evidence from Seasoned Equity Offerings. Review of Quantitative Finance and Accounting, Vol. 30, No. 1, 2008. Available at SSRN: https://ssrn.com/abstract=1066081

Chee Yeow Lim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

David K. Ding (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828-0245 (Phone)

Tiong Yang Thong

SIM University (UniSIM) ( email )

461 Clementi Road
Singapore, 599491
Singapore

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